VirTra, Inc. 2022 Form 10-K Summary
Business Context and Reporting Period
VirTra provides judgmental use-of-force, firearms and related training simulators, software, content, accessories and subscription services to law enforcement, military, educational and commercial customers. The filing covers the fiscal year ended December 31, 2022, compared with fiscal 2021. The company operates primarily from Arizona and opened an Orlando, Florida facility in 2022.
Financial Performance and Position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $28.3 million | $24.4 million | Up 16% |
| Gross profit | $16.3 million | $11.4 million | Up 43% |
| Gross margin | 57% | 47% | Up 10 percentage points |
| Operating income | $2.6 million | $1.5 million | Up 78% |
| Net income | $2.0 million | $2.5 million | Down 23% |
| Adjusted EBITDA | $3.6 million | $2.1 million | Up 72% |
| Net income per diluted share | $0.18 | $0.25 | Down |
| Cash and cash equivalents | $13.5 million | $19.7 million | Down $6.2 million |
| Working capital | $24.3 million | $25.9 million | Down $1.6 million |
Revenue growth reflected higher simulator, STEP subscription, accessory, curriculum, training and recurring warranty sales. Cost of sales declined 7.5% to $12.0 million, partly because of increased capitalized labor and higher recurring STEP revenue with no associated current-period cost of sales. Operating expenses increased 37% to $13.7 million, driven by higher marketing, facility relocation, the Orlando facility and research and development spending.
Net income declined because 2021 included a $1.3 million gain from forgiveness of a Paycheck Protection Program loan and 2022 had higher income tax expense. Excluding the 2021 PPP forgiveness, management calculated that 2022 net income increased 60%.
Net cash used in operating activities was $2.7 million, compared with $0.1 million in 2021. The 2022 use was driven primarily by increased inventory and unbilled revenue. Net cash used in investing activities was $3.3 million, principally for property and equipment. Financing activities used $0.2 million, mainly for debt repayment.
Total debt consisted principally of an $8.3 million secured mortgage note at December 31, 2022, including $0.2 million classified as current and $8.1 million classified as long term. The mortgage bears fixed interest of 3% and is secured by the Chandler property. Total liabilities were $20.1 million and stockholders’ equity was $33.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16%, while gross margin expanded from 47% to 57%.
- Operating income increased 78% despite higher general and administrative and research and development expenses.
- Net income decreased because the prior year benefited from PPP loan forgiveness and the 2022 tax provision increased to $0.6 million.
- Cash declined by $6.2 million, primarily reflecting operating working-capital needs, capital expenditures and debt repayment.
- Inventory increased to $9.6 million from $5.0 million, and unbilled revenue increased to $7.5 million from $3.9 million.
- Research and product development expense increased to $2.6 million from $1.9 million.
- Bookings were $6.4 million in the fourth quarter, and reported backlog was $27.7 million at year-end. Management expected most fourth-quarter bookings to convert to revenue in 2023.
- Government customers accounted for $22.4 million, or 79% of 2022 revenue. International revenue was $4.2 million, or 15%, and commercial revenue was $1.8 million, or 6%.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance. It stated that existing capital resources were expected to support operations and the current strategy for more than 12 months from the filing date, while noting that additional financing may be pursued for acquisitions, capacity expansion, product development and sales and marketing initiatives.
Management’s strategy emphasizes expanding the core law-enforcement and military business, increasing the total addressable market, broadening product offerings, developing headset-based and volumetric-video applications, and using partners or acquisitions where appropriate.
- Revenue concentration creates exposure to government budget reductions, procurement delays, contract cancellations, funding interruptions and changes in government priorities.
- Competition includes Axon, Laser Shot, InVeris, MILO and Ti Training, including competitors with greater financial, technical, manufacturing and marketing resources.
- Supplier constraints, logistics disruptions, pandemics, cybersecurity events and other operational interruptions could delay production or shipments.
- Export controls, ITAR, sanctions, licensing requirements and foreign-corrupt-practices compliance could restrict international sales or delay revenue recognition.
- Product safety, performance failures, warranty claims, personal injury claims and intellectual-property disputes could result in material costs or liabilities. The filing reported no material pending litigation.
- The company reported material weaknesses in internal control over financial reporting and concluded that disclosure controls were not effective as of December 31, 2022. The weaknesses involved insufficient management review of complex accounting and reporting matters and inadequate system and manual controls. Management reported subsequent improvements in workflow documentation and ERP training.
- The company has no off-balance-sheet arrangements material to investors and does not pay cash dividends.
- Unusual items included the prior-year PPP loan forgiveness, 2022 facility moves and expansion, the Orlando lease, increased stock-based compensation and performance-based awards, and the August 2022 departure of the former chief operating officer.
Important Facts for Investors to Verify
- Whether the $27.7 million backlog converts to revenue as expected and the timing of related installations and customer acceptance.
- The sustainability of the 57% gross margin, particularly the impact of STEP revenue, capitalized labor and product mix.
- Inventory growth, unbilled revenue and operating cash flow, which was negative despite reported profitability.
- Government-customer concentration and the status, duration and renewal terms of major contracts.
- Progress in remediating the reported material weaknesses in internal controls.
- Mortgage terms, the $5.96 million balloon payment due in 2031, and overall future liquidity requirements.
- Potential dilution from restricted stock units, equity awards and the remaining stock-option pool.
- Execution of new products, headset-based offerings, international expansion and the Orlando facility.